17.30: We end here Investment Europe's blog on the aftermath of Greece's latest federal election, with the hope you have found it both useful and informative. For more breaking news and analysis of macro and market events in Europe as they unfold, visit www.investmenteurope.net.
17.30: We end here Investment Europe’s blog on the aftermath of Greece’s latest federal election, with the hope you have found it both useful and informative. For more breaking news and analysis of macro and market events in Europe as they unfold, visit www.investmenteurope.net.
17.20: US stocks are heading lower this afternoon after Angela Merkel has told reporters awaiting a G-20 summit in Mexico this week that Greece should not expect softening of loan measures because it voted in a pro-bail-out party. Bloomberg reports the German chancellor saying: “The important thing is that the new government sticks with the commitments that have been made. There can be no loosening on the reform steps.” Both the S&P 500 and Dow Jones Industrial Average indices dipped after her comments.
17.15: A banking union in Europe is crucial as a first step to solve the current crisis, says F&C’s Ted Scott. In the short-term, Greece and its central creditors must negotiate on bail-out terms very carefully, he adds. Scott foresees the possible reduction in the interest rate, from 1.5%, on Greece’s bilateral loans; extending loan maturities; and extra growth measures to boost its economy.
17.00: Germany’s Dax index was one of few major European markets to close today higher, up 0.30%. Elsewhere in Europe by 16.45 GMT, France’s Cac 40 was down 0.69%; Milan’s FTSE MIB was 2.85% down; Spain’s Ibex 35 fell 2.96%; the broad Eurostoxx 50 was down 1.2%; while Great Britain’s FTSE 100 rose 0.22%. It was unclear how US markets would close: the Dow Jones Industrial Average was 0.26% lower, while the Nasdaq index of technology shares was up 0.23%.
16.40: Jenna Barnard, Henderson’s retail fixed income director, says markets gave “the thumbs down” to Greece’s election news, and she adds, the real problem is Spain. Vis a vis Greece, she says to expect “tense negotiations over the coming weeks”. Regarding Spain, she says: “The sovereign bond market is reaching breaking point.” The answer to Spain’s bank problems is not “layering senior additional debt from European creditors on top of existing government bondholders”. This just disadvantages existing private sector Spanish government debt holders. “A better solution would be to write down the value of subordinated bank debt in Spain to help bail out the banks. Until we see a more sustainable solution to the Spanish banking issue and a growth plan for Europe as a whole, we’re likely to remain quite negatively disposed towards risk assets.”
16.30: Germany’s chancellor Angela Merkel is meeting US president Barack Obama today, ahead of the congress of leaders of the world’s 20 wealthiest nations in Mexico this week. Merkel is widely expected to make some concessions to Greece on austerity, and may be requested to by Obama, who has said he wants Greece to remain in the euro, but that Europe’s woes are holding back US employment growth.
16.20: “Against all the odds and after weeks of speculation on a night of worldwide media attention, Greece comes back from the brink,” says Andrew Morris, managing director of wealth manager Signature – referring to Euro 2012, not the election. But the outcome from both the political and sporting results is the same – Germany in the ‘next round’. Morris foresees this week mirroring last week, as equity markets lose momentum after Monday’s rally. “Little has really changed; the reaction from other Eurozone politicians seems to be one of immense relief but importantly one which gives Greek politicians very little space to manoeuvre around.” And of Spain – facing Croatia tonight on the soccer pitch – Morris says: “Should [sovereign bond yields] not swiftly fall, there is every reason to believe that we will shortly discussing a Spanish bailout.”
16.00: ETF Securities has noted very strong buying of gold before Greece’s election, though bullion has fallen today by 0.14%, or $2.30 to $1,624.70 per troy ounce. ETF Securities suggests demand for safe havens may not yet be over – “Greece has avoid[ed] the immediate worst-case scenario, but Spain is now the epicentre of the crisis, [and] only extreme measures have a chance of pulling Spain bank from the brink that Greece has temporarily stepped back from. If the European authorities and the ECB do not step in forcefully, the crisis risks spiralling out of control.”
15.50: Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management, dubs New Democracy’s victory as “a small step forward” and says “Greece in the Eurozone is more palatable than a disorderly exit, which may have resulted if the party opposed to the country’s austerity plan, Syriza, had won”. Possible concessions from Greece’s central creditors as a result of this outcome, however, is “where the good news ends. New Democracy’s victory does not offer a solution to the country’s huge fiscal and social problems – there is a long, hard road ahead for the Greek people. Other European countries’ finances remain under pressure and scrutiny. There is also no sign yet of the collective political will to take the tough decisions required to implement a long-term strategy to resolve the crisis.” Turner notes previous packages by supra-national bodies have failed, before then mentioning future congresses of the G-20 (in Mexico), and next week’s EU summit (in Brussels). “It may be optimistic to hope for meaningful progress this time around.”
15.43: Failing to boost confidence after the Greek election will lead to further liquidity shots from the ECB, which will eventually stoke inflation. And bank runs have been dismissed too lightly by the market, says Jerome Booth, Head of Research at Ashmore Investment Management.”Policy makers are still behind the curve, not in front. Spanish yields above 7% reflect a lack of private sector confidence.”
15.27: Greece urgently needs stable government and to come up with a plan for fiscal reform, according to Darren Williams, senior European economist at AllianceBernstein. “There's still a risk that the process will once again descend into the type of chaos that followed the first election. (It is clear) the Greek fiscal reform program is failing and that a radical rethink is necessary.One positive factor is that even in Germany there is "growing acceptance that the Greek program needs an overhaul", including more time to complete its fiscal adjustment.
15.18: Greece's new government is likely to get an additional two years to meet the requirements of the bailout, according to news agency Dow Jones, cited in Swedish media. That in turn would suggest the country requires an additional €16bn in emergency financing. The issue of an extension, which was a key part of the political message that New Democracy and Pasok run with during the election campaign, will be brought up at the meeting of eurozone finance ministers on Thursday, before being discussed at the broader EU Summit at the end of June.
15.10: The Fed will announce the outcome from its policy meeting on Wednesday. CitiFX Strategy economists expect a modest extension of Operation Twist by $200bn to address the renewed signs of economic weakness ahead. Such measures need not match the risk-positive impact of QE1 and QE2, they said. Even if the tail risk of Grexit seems to have abated to a degree, the markets may need more aggressive central bank easing to maintain its positive momentum. In this respect, the FOMC meeting could disappoint and EURUSD-sellers could emerge soon.
15.04: The financial market response to the Greek election may seem at first glance surprisingly small, notes CitiFX strategy. EURUSD ‘only' rallied to the mid 1.27 region and then could that figure and is not in the low 1.26s. Similarly, the response in high beta currencies, oil and equities has been underwhelming.
14.45: Beyond a coalition over the next few months, the implications of the Greek election are not clear, says Gabriel Sterne, economist at Exotix. A durable crisis resolution depends upon building a broad constituency in Greece to support painful reforms, and demonstrating to investors that the bottom has been reached. The Eurogroup is "looking forward to a new Greek government that will take ownership of the adjustment programme." Conversely, the new Greek government is probably hoping for some big concessions from Europe. The most likely scenario in our opinion is that disappointment is heading towards both parties.
14.35: The prospect of an ND-led coalition has ratcheted down the fear factor for now, says Tristan Cooper, Sovereign Debt Analyst at Fidelity Worldwide Investment. “But everyone is asking themselves, what next? This result doesn’t alter the fact that the Greek economy is stuck in a deep hole with no clear escape route. The Troika has said that it will budge on program timing but not substance. With the March program already off-track, this begs the question whether any program can succeed when implementation risk is so high. Our biggest fear is that European policy makers will now heave a sigh of relief and take their foot off the pedal.”14.23: Greece has avoided an immediate worst case scenario, but Spain is now the epicentre of the crisis, says Martin Arnold (Senior Analyst) and Nicholas Brooks (Head of Research and Investment) at ETF Securities. Greece voted in the pro-reform New Democracy party by a decent margin on Sunday, reducing the risk of an imminent break-up of the Euro. Spain, however, is now contending with 10 year government bond yields near 7%, threatening a self-perpetuating debt confidence crisis. The situation is of particular concern as it follows a €100bn bank bailout loan package only two weeks ago, indicating that only extreme measures have a chance of pulling Spain bank from the brink. If the European authorities and the ECB do not step in forcefully, the crisis risks spiralling out of control.
14.11: Chris Iggo, fixed income CIO at Axa Investment Managers, is also looking at the next wobbling building block of the Eurozone - Spain.
"As long as the recapitalisation of Spain's banks is not sealed, they remain weak. For such a reason Moody's cut Spain's rating - just one notch better than Ireland's. The rates have almost reached the niveau at which Greece, Ireland and Portugal requested support. Spain's refinancing needs over the next three years comes to about €120bn, and there is also the need to plug an enormous deficit. If Spain's access to financial markets is blocked, this danger also exists for Italy. The more countries that must be drawn under the EU's rescue umbrella, the more it becomes difficult for the remaining creditor countries. Even the credit ratings of Germany and France are at risk. This is not exactly the kind of reciprocity that one might have wished for."
Iggo notes Spain and Italy represented about 30% of the Eurozone's government bond market, and their problems have led Bunds to hit new all-time lows repeatedly.
"If matters develop in the direction of common Eurobonds, then investors could bid farewell entirely to the Eurozone. The flight to safe harbours would pressure yet further the rates on ‘risk-free' bond markets."
14.00: Ian Heslop, head of quantitative strategies at Old Mutual Asset Managers, says the "hard work begins" now for Greece.
"The election still leaves more questions than answers. We went into this thinking - or hoping - that the Greeks would make the ‘right decision'. It does not look like they have made the ‘right decision' by a large amount. The next couple of days will show whether they can form a government and, if they can then the hard work begins. I do not see it as a happy period."
It would have been even unhappier if the Greeks had voted differently, he says, "but just because it has gone this way does not make it good."
As with an increasing number of fund managers this afternoon, Heslop looks beyond Greece to the next possible focus of the crisis.
"It is not really Greece that people are worried about any more, it is now more to do with the likely risk of contagion. The whole idea of a homogenous euro is perhaps beginning to break down as we speak.
"Personally I think Greece will still leave - it's bust - and the best outcome we can hope for is an orderly leaving of Greece. There is a growing realisation of what that means across Europe's politicians that they must stand behind everyone else. There needs to be a concerted effort from the German government to do what's required."
But Heslop says there is a line of thought Greece will have to leave for Germany "to feel comfortable doing what it has to do for everyone else."
At an investment level, he says the importance of understanding the macro picture, and having macro inputs to a process, is crucial.
13.55: After two leading German politicians called for some easing of the deadlines for Greece to meet its memorandum targets (see 10.15am), a government spokesman has said that Germany does not believe the time is right for granting Greece any leeway or additional time on its reform commitments, a local news agency reported.
“It’s decisive now for the troika to be convinced that Greece will stick to its agreements and fully implement the agreed reforms. Now is not the time for any kind of discounts to Greece,” said deputy government spokesman Georg Streiter. Asked about whether there was any room for giving Greece extra time to meet its reform targets, as suggested by German Foreign Minister Guido Westerwelle earlier on Monday, Streiter said: “We stand by what has been agreed.”
13.45 – The markets responded favourably to the news of a pro-euro election outcome in Greece but there are bigger issues at stake in the single currency zone, says Kevin Gardiner, head of investment strategy EMEA at Barclays.
But this weekend's election has not delivered a definitive answer to the euro question, as this requires greater fiscal and banking union, says Gardiner.
"This, in turn, requires better budgetary discipline and structural reform in the peripheral economies - developments that will take years, not weekends. Indeed, the election may not even have delivered a clear answer to the question of whether Greece will leave the euro: we have yet to see how the austerity package evolves, and whether Greece is capable of complying. Far from being the ‘either/or' deadline, this was just another staging post in the ebb and flow of greater euro area integration.
Unlike Greece, says Gardiner, "the Spanish banking system is big enough to threaten the euro, and so the crisis really hangs on the ability of the European Central Bank and other authorities to circle the wagons around those banks and limit contagion. In gauging that contagion, a 7% yield on Spain's 10-year government bond is seen by many as a financial Rubicon which, once crossed, heralds an eventual restructuring and the likely fragmentation of the euro. This is not the case: everything depends on whether such borrowing costs look likely to last, or are a product of short-term nerves and thin markets.
"We think the ECB and others can and likely will act decisively if needed, but it could still be a bumpy ride. This doesn't alter our strategic view that on a longer-term perspective, it is those risk assets - in particular, developed market equities - that likely offer the best risk-adjusted returns, and notionally ‘safe' assets such as government bonds that offer the worst. Not for the first time, tactical (short term) and strategic (long term) investment perspectives have diverged, and for long-term investors whose who are comfortable with equity risk, the current volatility is an opportunity to add to positions."
13.10 – The results from Greece mean that two out of three question marks over the survival of the single currency have been answered, said Anders Svendsen, chief analyst European Economies at Nordea.
The third one remains: will the leaders of euro member states take the necessary steps to secure the currency in the long term, for example, through fiscal and banking union, or possibly full-scale Eurobonds?
"The 28-29 EU Summit may provide a road map but most likely without any details," Svendsen said. "Years of political struggling lie ahead and no decisive measures are likely in the near term. For the markets this means continued high volatility and high likelihood that other countries will face problems during the muddle-through."
13.00 – Greek national revenues may have collapsed by -20% compared to last year, making it very difficult for any new government even if the original bailout timetable is renegotiated, according to Handelsbanken Capital Markets in Stockholm. "The national coffers will be empty by mid-July unless Greece gets new loans," Handelsbanken said in a note today.
The election outcome means there will be no immediate ‘Grexit', but with unemployment at 22% and rising, and protests against austerity likely to continue, Handeslbanken said that its "main scenario is still that Greece must leave the euro in order to turn its economy around." Focus will instead return to Spain and Italy's problems.
Citing French newspaper Le Journal, Handelsbanken said that eurobonds are unlikely to be put in place after French president François Hollande seems to have accepted the German approach. Banking union also "does not seem to be on the cards." "The short-term solution to the euro crisis will probably be money, money and more money. The ECB will need to help out and the €500bn in the ESM will be needed, as well as more money from the IMF, which will probably receive a much needed cash contribution at the G20 meeting in the next few days."
12.50 – The markets may have enjoyed a rally but the most worrying number on Monday came not from Greece but Spain: the yield on its 10-year bonds rose above 7% again. "The danger is that the temporary relief rally witnessed on Monday, including a rise in the euro, sends the wrong message to policy makers."
Two big issues remain, says the FT: firstly, Greece must find €11bn of cuts by the end of the month to secure another tranche of its second bailout. Without that, it is unlikely Germany will agree to soften the bailout's terms. If that does not happen, another election appears a certainty within months.
Secondly, the larger task is "to secure the viability of the euro, regardless of whether Greece remains part of the eurozone. Investors should keep their eyes on the bigger picture."
12.30 – Prices of UK and German 10-year government bonds have risen and yields fallen as of midday today, according to data from Bloomberg.
The UK gilt price was up £0.515 to £121.41, equivalent to a yield fall of -0.052%, putting the yield on 1.61%. The German 10-year Bund was up €0.430 to €103.33. The price gain represented a yield contraction of -0.046% to 1.39%.
12.00 – Last week the Swedish stock market celebrated Spain with a half-day rally. The Greek election results rally only lasted 1.5 hours, and since then the market has headed lower, reports Affärsvärlden, a business paper based in Stockholm.
Instead the Greek soap opera is set to continue. The election means that catastrophe is avoided for a while longer, but so far what shines is the lack of any actual savings programmes. The Greeks must save and stick together, the paper says, but this is not easy with most of the country's population against the government. Meanwhile, the most important few months of the year - when the tourists come - await.
11.40 – Shares on the Athens Stock Exchange opened strongly after yesterday's vote. The benchmark stock index was up 6.05% at 10.35am (local time) with bank shares jumping 13.3%. "It is a relief rally, the stock market is cheering the election outcome, with eyes now focused on the formation of a new government and its policy priorities," said analyst Manos Giakoumis at Euroxx Securities.
11.30 – One of the post-poll scenarios, and the best investor reaction, according to Exotix Asset Management features the following key issues: – Memorandum may be re-negotiated for smoother adjustments; – Structural reforms are gaining momentum; – Privatisations in the foreground; – Banking capitalisation finalises in Q4; – Tax collection improves; and – Deposits gradually increase. Recommended ‘Buy': – Strong fundamentals - dividend stories; – Privatisation targets; and – Speculative flows on banks. Avoid – short selling
11.20 – Antonis Samaras will meet with Syriza leader Alexis Tsipras at 2pm (local time) in parliament, and with Pasok’s Evangelos Venizelos at 6pm, New Democracy has announced.
11.12 – The financial markets will be relieved that Syriza did not emerge as the most successful party, which would likely have stymied all attempts to form a government, putting the forthcoming €23.5bn Troika disbursement at risk, says a research note from broker Charles Stanley.
However, Pasok leader Evangelos Venizelos has indicated that he would like Syriza to be involved in a government of national unity. "This implies that horse-trading may still be required before a working government can be formed but, initially at least, the markets cheered the least worst result."
11.07 – Safety-seeking investors have modestly increased their appetite for German 10-year debt this morning, despite Greece voting ‘yes' in an election widely seen as a referendum on its Eurozone membership. German sovereigns yielded 1.45%, by 10.45 GMT, according to Bloomberg, down from 1.52% at 07.15.
11.05 – “The unfortunate reality of whoever ends up governing Greece is that there is no money; the primary deficit, or the difference between spending and revenues before you count interest payments, is widening again," says Sandra Holdsworth, fixed income manager at Kames Capital in Edinburgh.
"The normal routes of borrowing are not open to them. The only lenders are the Troika of the IMF, EU and the ECB. The Troika members are not keen to risk anymore money and are in no mood to be very helpful.
"The result brings to the fore the spectre of default, banking collapse and possible departure from the Eurozone. In turn, this brings an increased likelihood of severe adverse societal consequences, something that financial markets have feared now for some time. Central banks around the world are ready to ease monetary policy or add liquidity as necessary."
"European politicians however, appear impotent. The sticking plaster solutions of the EFSF and the ESM are not enough, especially now that Spain appears doomed to a full bailout. Only a move, or even a sniff of a willingness of a move, towards a fiscal union will encourage investors back into problem countries on a long-term horizon."
10.55 – The Greek election may have returned a best-case scenario for the markets (a conservative government with a workable majority), but “this is no panacea when it comes to either the problems of Greece or those of the rest of EMU”, said Jane Foley, senior currency strategist at Rabobank International.
Spanish 10-yr yields are back above 7% after an early improvement, EUR/USD is already trading below its session high and the FTSE 100 is also trading a touch off its opening levels.
“Faced with deepening recession there is a significant reason to fear that Greece will not be able to meet its agreed liabilities. It wasn't just the Syriza party that had been looking for a renegotiation of the bail-out, the New Democracy Party had indicated that it would be looking to re-negotiate the terms; although the degree of compliance with EU requirements is set to be stronger with a New Democracy led coalition.
German officials have indicated a softening of their stance taken with Greece, but even this isn't clear, says Foley. “There may be a path to be forged between appeasing the needs of the Greece people on one hand and maintaining the appearance of austerity and structural reform on the other.
“However, this will be a difficult path to navigate and there are no guarantees that the new government will be successful at achieving this. Greece's position within EMU may have received a life-line as a result of this election, but it is impossible to be 100% confident that this will remain the case in the coming years.”
10.50 – Allan von Mehren, chief analyst, head of International Macro at Danske Bank, notes that the early relief rally has turned, particularly with Spanish 10-year government debt yields rising to 7.3%, the highest for 15 years.
The change puts renewed pressure on Europe’s politicians to find lasting solutions to the eurozone problems. Mehren said there were two key steps the politicians should consider. Firstly, they must agree something concrete at the Summit set for the end of the month, such as the future use of Eurobonds. Secondly, it is necessary for the ECB to engage in more quantitative measures, such as buying Spanish and Italian bonds, repeating the dose of monetary medicine the bank gave to the markets at the end of 2011. Mehren said he expects the ECB meeting on 5 July to adopt additional non-standard methods as it has done in the past few years.
10.35 – The eurozone will muddle through and the global outlook will stabilise over the coming quarters, said William Sels, UK head of investment strategy at HSBC Private Bank. “As a result, we maintain our neutral view on risky assets over 6-12 months.”
Following a strong start to the year, investor sentiment has suffered significantly following renewed Eurozone stress and questions about the single currency’s future, he said.
“Looking to the future, there are some reasons to believe that we will pull out of this slowdown later this year or next. To name a few: lower oil prices helping consumer sentiment; a global loosening of monetary policy over the past months; inflation on a falling trend worldwide; and a new debate in the Eurozone about the need for an economic growth policy (jointly with austerity). Taken together these measures will eventually support a recovery in economic growth and a more favourable environment for investors.”
In the meantime, he said, “equity markets are generally looking attractively valued from a long-term perspective. In the short-term however, we could still see some weakness as the slowdown persists. Certain credit markets can offer an attractive yield pick-up in the current low rate environment. Indeed, cash remains a poor long-term investment, given the very low rates available today.”
10.30 – The White House said in its statement on the election that it wants the country to remain in the euro.
“We congratulate the Greek people on conducting their election in this difficult time. We hope this election will lead quickly to the formation of a new government that can make timely progress on the economic challenges facing the Greek people. As president Obama and other world leaders have said, we believe that it is in all our interests for Greece to remain in the euro area while respecting its commitment to reform.”
“Going forward, we will engage Greece in the spirit of partnership that has guided our alliance and the friendship between our people.”
10.25 – Germany’s finance and foreign ministers have given their verdicts on the Greek elections.
Finance minister Wolfgang Schaeuble said: “The German Federal Government would consider such a result [New Democracy victory] a decision by Greek voters to force ahead with the implementation of far-reaching economic and fiscal reforms. This path will be neither short nor easy but is necessary and will give the Greek people the prospect of a better future. In order to succeed, the program requires political stability.”
Foreign minister Guido Westerwelle said: “We want Greece to stay in the euro; we want Greece to continue wanting to belong to Europe. But Greece will decide now on its own path; you cannot stop anyone who wants to go. What we cannot accept is the agreements that have been made being declared null and void. There can’t be substantial changes to the agreements but I can imagine that we would talk about the timelines once again, given that in reality there was political standstill in Greece because of the elections, which the normal citizens shouldn’t have to suffer from. But there is no way out of the reforms. Greece must stick to what has been agreed.”
10.20 – Direct confrontation with the rest of the eurozone will most likely be avoided in the near-term, says Valentijn van Nieuwenhuijzen, fixed income strategist at ING Investment Management.
Once the new government is confirmed, the Troika is likely to return to Athens to re-start negotiations. Whether or not this also decreases the chances of Greek exit in the future depends on how far the new government can renegotiate the bail-out package with the Troika, says van Nieuwenhuijzen.
“As it currently stands, the speed with which fiscal and structural reform is required may well be too much for the Greek economic and social structure to bear. Hence, if these terms are not relaxed, the government may not survive for very long. Fortunately, the Troika seems to be somewhat more open to the idea that very stringent fiscal consolidation is self-defeating because of the detrimental effects on growth and tax revenues.”
But any renegotiation of the bailout package will have to strike a fine balance between two issues which are difficult, but not impossible to reconcile, believes van Nieuwenhuijzen.
“On the one hand, Greece must be given a chance to reform without killing its growth prospects further. On the other hand, the act of renegotiation itself may increase the risk of moral hazard, either by Greece itself or other programme countries as they may seek to extract further concessions in the future as well. This raises the risk of EMU turning into a transfer union, where the very act of providing funding to the periphery impedes the necessary reforms. Some mechanism must thus remain present to keep the pressure on Greece.”
10.10 – The best outcome for Greece may be for New Democracy party leader Antonis Samaras to morph into a Greek version of former UK prime minister Margaret Thatcher, even as the EU,IMF and ECB troika accept a partial default on public debt, said Torgeir Høien, lead Global Fixed Income portfolio manager at Norway’s Skagen Funds.
“Whatever the outcome, the tough part is upcoming negotiations of the terms of the bail-out packages with the troika. Samaras has said for a long time that the austerity package need to be renegotiated, and he hardened his stand against the austerity conditions last week. The troika has signaled that they are ready for compromises. But the negotiations are going to be difficult, especially if the troika faces a government that includes Democratic Left and Independent Greeks. It’s to be expected, though, that a new agreement, with somewhat lower interest rates and a little less burdensome austerity conditions, is going to be signed by Athens and the troika within a month. EFSF/IMF money then keeps flowing to Greece.”
10.00 – Investors may be quick to shift their focus to other key events this week, said Valentin Marinov, FX strategist at Citi.
“The euro zone debt crisis will feature prominently on the agenda of the G20 meeting, which starts today in Mexico. We suspect that the leaders of the world’s largest economies will continue to call for quick and sustainable resolution. The most important and, we think, EUR- and risk-positive outcome from the meeting will be concrete indications that the G20 countries are moving closer towards extending the lending capacity of the IMF.2
This has proved contentious in the past, as it could dilute the dominant voting position of the developed countries. Marinov says any disappointments from the meeting could be used by investors to sell into EUR-rallies. The euro zone finance ministers will meet on Thursday to discuss the details of the Spanish bank bailout and debate proposals on how to deal with sovereign debt crisis.
“We suspect that key to market reaction will be indications that measures to pool sovereign and bank risks at euro zone level will be considered as part of the solution. Our biggest concern remains that the euro zone core will continue to oppose any decisive steps towards banking and fiscal union. If this is confirmed, EUR- and risk-correlated currencies could struggle to extend their gains. We suspect that a disappointing Spanish or French bond auctions later this week could add to investor concerns about further escalation in the euro zone debt crisis.”
0955 – German manager Union Investment believes the outcome of Greece’s election only provides temporary respite for investors.
“With the victory of the conservatives Nea Demokratia in Greece’s federal elections, the hopes of investors have at once been fulfilled, but the uncertainty on markets is certainly not past us as a result. The close victory of Nea Demokratia provides, for the most, only temporary relief for eurozone politicians and financial market participants, as it averts the short-lived coalition [with] the anti-European radical left Syriza party. Presumably Nea Demokratia will strike a coalition with the socialist PASOK party. A broader coalition government of Nea Demokratia, PASOK and for example the democratic left Dimar party would be desirable, to usher in more political stability. The process of building government remains very uncertain. Greece after these elections seems far away from a situation of political stability with healthy majorities in the parliament, though this is exactly what the Greeks need now.”
09.45 – Yesterday’s election changes nothing in terms of allocation, said Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment.
Although the risk of a disorderly exit from the eurozone has been cut, any new coalition government in Greece “is unlikely to be able to restore economic growth or deliver effective reform without substantial financial help from the reset of the euro area.”
Markets will again turn towards the situations in Spain and Italy, while the outlook for global growth remains weak. “We remain cautious on stocks and commodities, preferring gilts, global property and cash in our multi asset funds.”
0935 – The news from Greece appears to have been well received in the markets, said Craig Erlam, an analyst at FX broker Alpari.
“The major European indices all look set to open more than 1% higher. But we have already started to see a small pull back, which could mean the rally is short lived. If New Democracy and Pasok fail to form a coalition government, this could still open the door for Syriza to form an anti-bailout coalition, or lead to a third round of elections next month. Greece have a bond payment due before that time, which could still threaten Greece’s position in the eurozone before a government is formed.”
“We also must remember that Greece is no longer the only major threat in the Eurozone. While a bailout for the Spanish banks has apparently been agreed, this in no way means the banking system is fixed. We then also have the issue of Spanish bonds. 10-year Spanish debt was last trading at 6.9%. The figure is dangerously close to the 7% region, at which Greece, Ireland and Portugal required a bailout. We could therefore face a fresh round of negotiations over the next couple of weeks regarding a full Spanish bailout and the terms the bailout would bring.”
09.25 – The negotiations to form Greece’s next government will weigh on markets this week, said RBC Capital Markets. There may even be times in the next few days when it is doubted a new government can be formed at all. RBC expects a government to be formed, because there is less incentive to push for further fresh elections, although “at the end of this the govt will be fragile and euro membership is likely to remain an open, unanswered question.”
09.10 – Equity markets were up and gold was down in early trading today. As of 08.45:
The Cac 40 was up 1% Dax up 1%;
FTSE 100 up 0.75%
Euro down 0.65% vs GBP
Nikkei rallied overnight by 1.77%
Topix was up 1.68%
Hang Seng rose by 1.11%
Gold down 0.5% at $1619.90 per troy ounce.
09.05 – Jens Ehrhardt, manager and founder of Germany’s DJE Kapital, said Greece would still be better off outside the euro.
“In the long term, it would be better to have Greece out, especially for the Greek people because you cannot give Greek people work if Greece is in the euro. The euro is a ‘lose-lose’ for [Greece]. Before, it was an opportunity for people to raise debt at lower interest rates – and it certainly helped countries like Spain because if they had pre-euro rates they could not have behaved that way. Even if it were difficult to end this experiment [the euro], it would be a better thing. For as long as peripheral eurozone countries have the euro, they will face headwinds for their exports, and the banks cannot give them new loans. First they had access to huge amounts [of borrowing] but this led to huge amounts of debt, and the higher they pushed it.”
08.55 – The Greek elections may have given markets a reason to make gains today, Monday, but despite the outcome the European banking and sovereign debt crises are nowhere near over, warned BankInvest, the Danish manager.
However, the results are likely to give the troika of the EU, IMF and ECB the confidence to pay out a tranche of €1bn that they held back after the last election on 6 May. This payment is required to ensure salaries and pensions are paid in Greece on 20 July.
08.40 – With Syriza likely to believe it can strengthen its position further in opposition, forming a working coalition will not be straightforward, said Argonaut partner Barry Norris. Assuming New Democracy can form a government, negotiations will start with the EU on easing the terms of the bailout, for which there will be some sympathy amongst other eurozone leaders.
22.10 17 June – Swedish minister for Finance Anders Borg has said that regardless of the outcome of Greece’s election, the country will need to renegotiate its emergency loans. In comments carried in the country’s biggest business daily Dagens Industri, Borg said that should the provisional results stand then it reduces uncertainty in the short term. “But it is important to state that there is an awful lot to do before Greece is back on dry land. They presumably need to renegotiate the deal on emergency loans, and manage the formation of a government.”
17 June 22.20 – The Eurogroup of finance ministers of eurozone member states has issued a statement in the wake of the Greek elections. The statement in full appears below:
The Eurogroup takes note of the provisional results of the Greek elections on
17th June, which should allow for the formation of a government that will carry
the support of the electorate to bring Greece back on a path of sustainable
The Eurogroup acknowledges the considerable efforts already made by the
Greek citizens and is convinced that continued fiscal and structural reforms
are Greece’s best guarantee to overcome the current economic and social
challenges and for a more prosperous future of Greece in the euro area.
The Eurogroup reiterates its commitment to assist Greece in its adjustment
effort in order to address the many challenges the economy is facing. The Eurogroup therefore looks forward to the swift formation of a new Greek
government that will take ownership of the adjustment programme to which
Greece and the Eurogroup earlier this year committed themselves.
The Eurogroup expects the Troika institutions to return to Athens as soon as a
new government is in place to exchange views with the new government on
the way forward and prepare the first review under the second adjustment
15 June 15.20 – The European Central Bank is on standby to keep banks flush with liquidity if Greece creates fresh financial market turmoil, says Northern Trust, citing comments from Mario Draghi. In the wake of Bank of England plans to pump £100bn into the UK, it hints at co-ordinated strategy by the world’s top central bankers.
15 June 15.10 – Russell Indexes, the maker of indices and benchmarks, said its “financial crisis rule,” already included in the Russell Index methodology, can cope with a Greek exit from both the eurozone and potentially the EU.
15 June 15.00 – Barry Norris, partner at Argonaut Capital Partners and manager of the Argonaut European Alpha and Argonaut European Absolute Return funds, sees three possible outcomes from the election in Greece this weekend:
– New Democracy led coalition (Samaras as PM)
– A Syriza led coalition (Tsipras as PM)
– No party is able to form a government and further elections are scheduled
InvestmentEurope is blogging key information, views and data surrounding the weekend’s elections in France and Greece.